Shadow tax minister strikes hopeful note on dealing with loopholes in the international tax system multilaterally, at CIOT Labour event (plus audio)
Shadow Tax Minister Anneliese Dodds told our Labour Conference fringe debate that unilateral approaches are less effective than a joint approach across nations when it comes to taxing companies, but struck a hopeful note, saying there is ‘a lot of support for dealing with loopholes in the international tax system’.
However, said Dodds, it was unclear if the UK government intends to collaborate on international efforts to tax multinational companies (such as French President Macron’s initiative). She added that Labour was working with social democrats in Europe to stop a ‘race to the bottom’ on tax.
The debate, co-hosted by the CIOT with the Institute for Fiscal Studies (IFS) and Labour Business, was on the topic: What does fair business taxation look like in a digital world? As well as Anneliese Dodds the speakers were Glyn Fullelove, Deputy President of CIOT, and Helen Miller, Head of Tax at IFS. The debate was chaired by Hamish Sandison, Chair of Labour Business and held in the ACC Liverpool on 23 September 2018, as part of the Labour party’s autumn conference. Labour Business works as the prime network for anyone interested in enterprise, finance and business in the Labour party, providing a link between the Labour Party and the finance and business communities.
In her remarks the shadow minister (nearest to the camera in the photograph of the event) said there were problems with the arm’s length principle used for transfer pricing. She observed that, at EU level, they have been talking for some time about a formula based system. Some have suggested applying this to some groups of firms, not others. This would be complex and would need a debate about the fundamental building blocks of the tax system, she thought.
Dodds confirmed that it remains Labour policy to put the corporation tax rate back up “to 26 per cent, eventually. [Plus a] small business rate [of] 21 per cent.” She acknowledged that it was getting harder to collect corporation tax from digital firms, but thought that was a logistical problem and not a reason to get rid of corporation tax, as some argued for. She said that Labour wants to clamp down on false incorporation. Dodds also reconfirmed Labour’s support for public country-by-country reporting by multinational companies.
On the specific question of taxing large technology firms, Dodds’ view is that there must be a rebalancing of the tax situation to help ‘bricks and mortar’ business.
In other comments, Dodds thanked the CIOT for the ‘dispassionate and neutral advice’ it offers to policy makers when assessing tax proposals. She argued for a more progressive tax system, pointing to ONS figures from 2014-15 suggesting that the very best off 10 per cent are paying less of their income in tax than the worst off ten per cent of people. She repeated her view that tax needs to be transparent, fair and progressive. Labour is trying to form its tax policy ‘very openly ‘in conjunction with a range of different stakeholders and, generally, there seems to be more support for a more progressive system dealing with loopholes where they exist in the international tax system, she said.
Dodds also talked about the need for HMRC to be appropriately resourced. She has been on a tour of ten tax offices that have either already closed or are due to be closed due to the restructuring of HMRC. She found ‘we have a big bump really of people who are highly skilled within HMRC who are leaving their jobs because of the restructuring process… new people coming in who do not have that expertise and that [expertise] is needed even more when it comes to these complex areas, especially around profit shifting.”
Labour has set out a number of proposals in its Tax Transparency and Enforcement Programme which should give greater predictability to taxation, Dodds told the meeting. Labour’s programme also targets false incorporation and calls for large companies tax returns to be publicly filed. With a smile she said that this was not hypocritical, as Labour wants all MPs to publish their tax returns too.
Helen Miller set out to counter misconceptions about corporate taxes in her speech, explaining that taxing large companies is not synonymous with taxing rich people. She said 87 per cent of tax is handed to government by business, but all taxes are ultimately paid by people. She added that corporate tax comes from the incomes of shareholders, workers or consumers.
Instead of thinking about fairness, let’s look at distortions, for example how the tax system encourages companies to shift profits, Miller suggested. Corporate tax may distort where firms choose to locate profits and real activities, she added.
Everyone agrees the current system has problems but fairness does not offer a criteria that helps allocate corporate tax, argued Miller. After all, taxes based on residence of the headquarters, location of subsidiaries, where value is created, location of consumers, could all be argued to be fair.
The government can keep adding patches to the general tax regime, some specifically for digital, but she warned that that will not lead to a surge in UK tax revenues or fix all competition issues. An alternative is to move to a system that has fewer problems. Intangible assets are hard to measure and ideas to tax multinational digital companies in terms of their users will be tricky. She suggested, again, that a practical way forward was to try to reduce distortions. A destination based corporate tax has merits, she said, because consumers are less mobile than businesses, it removes incentives for firms to shift activities and for governments to compete with one another. But, of course, there will be winners and losers – for example some countries will get more revenue than others – it is not perfect.
Glyn Fullelove said that fairness comes down to clear rules with certainty of treatment, that everything that should be taxed is taxed, there should be no double taxation and no unwarranted advantages for a particular group of taxpayers. On this final point, Fullelove accepted concerns that companies get tax breaks or ‘deals’ that individuals cannot. And the related concern that global digital businesses have advantages over traditional businesses and domestic business.
Fullelove said there is a ‘debate within a debate’ on how corporates are taxed, such as high street versus online retailers, the use of people’s data, trying to define what is digital and what is not, and even the fairness of the BBC licence fee. This discussion is within a context of a much wider debate on how digitalisation is affecting our lives and ‘traditional’ businesses, he opined.
“The peak tax avoidance by companies was 2007, just before the last crash,” said Fullelove. “Post 2007 there has been a significant amount of legislation such as DOTAS, the Banking Code, GAAR… and also, having worked in a FTSE100, any FTSE100 tax director that went to their board and said I want to do one of the schemes will no longer be in their job because those companies are so focused on reputational risk, that the bottom has fallen out of that tax avoidance market.”
On base erosion and profit shifting, governments have known and encouraged this, Fullelove continued. When this is happening all over the world, it means MNCs have an opportunity to reduce their tax liability which is not open to individual taxpayers - which is unfair, he said. Since 2013, there have been concerted international efforts, such as the BEPS project, with most legislation on this now gone through the UK Parliament. It is no longer possible for companies, such as Google, to move profits from the UK and stick it in the Cayman Islands and not get taxed.
On user created value, Fullelove said a ‘customer’ and a ‘user’ are different. A user is not a customer because there is not transaction between the user and Facebook. Data is talked of as gold dust but the value comes from the analysis, he suggested.
On the interim measure of a revenue tax of a small per cent that Google or Facebook, for example, derives in the UK, he said there are issues including determining how to measure revenue they derive in the UK, and he is concerned at some of the rates suggested (three per cent or five per cent) because three per cent of a company’s revenue is ‘a heck of a lot’ more than three per cent of their profit, and it is the easiest thing for the extra cost to be put on customers.
Among the questions in the Q&A session was on user created value, tax credits and taxes beyond corporation tax. Dodds noted the increased use of taxes to try to deliver goals beyond revenue raising. She said there needs to be a bigger focus on reliefs with better scrutiny.
Introduction by Hamish Sandison and speeches by Helen Miller and Glyn Fullelove
Slides from Miller and Fullelove
Dodds MP and Q&A session